EC agricultural policy and land use

Milk quotas and the need for a new approach

Christopher J. Downs

This Viewpoint argues that although recent jnnovatjons in the CAP, specifi- cally milk quotas, have been success- ful in containing output and budgetary expenditure, they have not addressed the under/yin9 problem of jntensi~ca- tion - increasing output per hectare. Fundamental reform of the Common Agricultural Policy must take account of two things - the unacceptability of European Community surpluses being ‘dumped’ onto world markets, and the environmental impact of mod- ern farming. fmpl~citiy, other of the Articie 39 objectives may have to be accorded a lower priority.

The author is an Economist at the National Farmers’ Union, Agriculture House, Knightsbridge, London SWlX 7N.l, UK.

This article presents the views of the au- thor and should not be taken as in any way representative of the views of the NFU.

‘Suspended at the time of writing due to failure to reach agreement on this subject.

The method by which European Com- munity (EC) farmers’ incomes arc supported - by raising the prices they receive for their output above those which would prevail in a free market - has become unacceptably expensive to the EC budget, as well as to farmers in the rest of the world whose prices are pushed down by the subsidized ex- porting of EC surplus output. The pressure for fundament~ll reform has been growing. in particular due to the

high priority accorded to agriculture in the Uruguay Round of GATT neg(~tiations.’ The major innovation introduced to the Common Agricultu- ral Policy (CAP) in the 1980s has been milk quotas which have brought milk output under effective control and, with it, budgetary expenditure on milk support. One of the aims of this arti- cle, however, is to assess the success of this innovation against another crite- rion.

Agricultural policy affects both the amount of land that is farmed and the way it is farmed - the quantity and quality of land use. Both of these aspects are of vital importance and of concern to the wider public.

The rural environment is largely a by-product of f~~rming, ie there are

external effects on the countryside and environment which are associated with farming. These are termed exter- nalities precisely because the by- product generates no revenue for far- mers and any environmental damage caused by their farming activities im- poses no costs on them. The environ- mental impact of farming is therefore largely external to the farmers’ de~is~on-nlaking process. With in- creasing public concern for the en- vironment, the social benefits ‘and costs of farmers’ activities must now

be accorded due weight in the agri- cultural policy debate. Consequently this article addresses the effect of quotas on the quality of land use.

The impact on the quantity of land use is of interest because any reduc- tion will release land to contribute to the overproduction of other agrioultu- ral commodities. It will be argued that their impact on land use may not commend milk quotas as a policy for the 1990s.

~o~tro~lir~~ milk ~r~~~l~~tioI1 Dairy farmers in the EC have been working within the constraint of a quota system since April 1984. The system is due for review after the

206 LAND USE POLICY July 1991

Source: EEC Daity facts and Figures, Milk valeting Board, Thames Ditton, UK, various years.

This yield growth is attributable to three factors: genetic improvements through selective breeding, improved husbandry and structural change. Structural change merits further ex- planation since it is probably more dependent on agricultural policy than the other factors. It describes a long- term trend decline in the number of herds and a consequent concentration of production on herds that are steadi- ly increasing in size. The significance of this is that yields are positively correlated with herd size. So the rate of structural change affects overall yield growth.

*Ministry of Agriculture, Fisheries and Food, Milk Production Before and After Quotas, MAFF, London, UK, 1988. 3M. Dillen, ~i/k Quotes: Their Effects on Agriculture in the EC, Eurostat, Luxem- bourg, 1990.

A number of measures were intro- duced to try to control milk produc- tion in the period up to 1983. The introduction of the co-responsibility levy in 1977 contributed funds to help

The reactions and responses of pro- ducers in the UK have been documented in detail.’ Here I provide no more than a broadbrush account of the reaction of farmers across Europe as a whole, drawing on a report by Dillen recently published by the EC.’

The precise method of impiementa- tion of the quota system varied be- tween member states, and so did far- mers’ reactions to their introduction.

LAND USE POLICY July 1991 207

Table 1. Milk yields and dairy cow populations for EC(IO), 1975-89.

1975 1960 1981 I 982 1983 1984 1985 1986 1987 1988 1389

Average milk yields Dairy cow population (kglcowlyear) (millions)

3 622 25.3 4086 25.0 4 170 25.0 4 314 25.4 4 385 25.9 4 283 25.0 4 424 24.3 4 580 23.9 4 534 22.5 4 582 21 .s 4723 21.6

Uruguay Round of GATT talks has been concluded. Even at the time of the UK’s accession in 1973, the EC was more than self-sufficient in milk. Between 1975 and 1983 (the last year before quotas) total EC production rose by 20% to over I1 1 million ton- nes. Total EC consumption mean- while remained fairly stable, although estimates of the total vary, and con- sumption per head of some dairy pro- ducts exhibited a rising trend, eg yoghurt and cheese. At a conservative estimate, by 1983 the surplus was of the order of 25 million tonnes of milk.

This increase in production was due to steadily rising milk yields per cow from a fairly static total dairy herd. Although there were fluctuations in the intervening years, the herd num- bered 25.3 million head in 1975 and 25.9 million head in 1983 (see Table 1). The trend increase in yields mean- while was a little over 2% a year.

meet the rising cost of disposing of the EC’s surplus milk output, but had no impact on production. A system akin to the stabilizers currently applied in the sheep meat and cereals sectors was introduced in 1982. A ‘guarantee pro- duction threshold’ was set and if this threshold was breached then there would be a reduction in the institu- tional price agreed for the following year. The threshold was exceeded in 1982/83, but the subsequent price cut failed to produce the desired result and in April 1984 the quota system was introduced.

The important feature of this system was the super levy, for this was the essential difference between the quota system and the guaranteed threshold system. It introduced a much more direct financial penalty on individual producers for exceeding quotas.

Quotas were set for each member state for the transitional year 1984185 which were equal to their 1981 pro- duction plus 2%. This meant that an average reduction of about 4.2% was required on 1983184 production. The following year the quota was reduced to 1981 production plus 1%. There were further cuts in 1987188 and 1988/ 89.

Effects of quotas

(For example, in Germany the cut- backs were heavily skewed towards larger producers.) Because 1981 was taken as the base year, the extent of the cutback required in 1984185 varied according to the increase in produc- tion that had occurred in the interven- ing period. The most severe cutbacks were required in the UK and Holland, while Italy and Eire were permitted to use 1983 as the base year and so were much less seriously affected.

Farmers’ immediate reaction was to adjust feeding so as to reduce yields. Yields fell in 1984/85 in the UK and Germany by approximately 4.5X, while there were smaller reductions in France and elsewhere. In all countries except Germany average yields re- sumed their upward trend the follow- ing year. and the adjustment to quotas began to fall more heavily on the number of dairy cows.

Initially farmers had only one op- tion - to cut yields. But in the longer term they are able to reorganize their operations so as to reduce fixed costs. This is achieved through reducing cow numbers and, with them, labour re- quirements, interest costs, etc.

The response to reductions in the quota appears to follow a similar pat- tern, as the experience of 1987 showed. At first yields are reduced or held below what they would otherwise have been. But then farmers again seek to reduce cow numbers, making yield growth possible within the quota and in fact making it a desirable objec- tive. All countries in the EC(l0) have lower dairy cow populations now than in 198.3.

The adjustment of cow numbers also occurs through the elimination of whole herds. This process essentially involves the removal of smaller, Icss- productive herds and the transfer of their quota to larger, lower-cost pro- ducers. It is not clear to what extent quotas have impeded or encouraged this structural change. In 1979 over 37% of herds were of under 20 cows in EC(Y), but by 1983 this proportion had fallen to around 30% and to 35%

4D.V.G. Smith, ‘Land use changes and the effects on other enterprises’, in Alison Bur-

in 1987. Between I984 and 1988 pro-

rell, ed, Milk Quotas in the European Com- ducer numbers fell by 27% in France,

munity, CAB International, Oxford, UK, 16% in Holland and 13% in the UK.

1989. The effect of quotas is simply to pre-

208

vent this structural change increasing total production, and their impact on the rate of structural change must depend greatly on the ease of quota transfer which varies in different member states.

Land use by the dairy sector

No data are available on the land used

for milk production in the EC. Esti- mates are possible where information on average stocking rates is available. Smith has published such estimates for the UK which show a steady decline of around SO 000 ha a year in the land used over the six years to 1983, due to increasing stocking density.” In the three years after the introduction of quotas Smith found that the rate of land release doubled as cow numbers were reduced, in spite of the fact that stocking rates fell slightly.

Measuring stocking density in terms of forage area per cow is insufficient, however. since a significant area of arable land is used for the production of cereals to be fed to dairy cows in the form of concentrate feeds (which con- tain around one-third cereals). Smith has estimated that the area needed to produce the cereals required by the UK dairy herd could have fallen to less than 200 000 ha by I992 compared with 450 000 ha in lY80/81. This is due to falling cow numbers and declining concentrate usage by dairy farmers. and rising cereal yields.

The same factors are at work at the EC level. If yields continue to increase at a rate of 2% a year, and there is no change in stocking rates or in the total EC quota, then it would appear that 20% fewer dairy cows may be needed in the EC by the end of the decade. A

20% reduction in the land requirc- ments of the dairy sector would prob- ably amount to over 2 million ha. In fact, as agricultural practices in Greece and the other less-developed EC countries catch up with those in the rest of the Community, yields could rise by more than 2% a year on average and stocking densities could increase. It is also arguable that stock- ing rates in the advanced dairying sectors of northern Europe will begin to increase again in the absence of further quota cuts as farmers strive to

LAND USE POLICY July 1991

pare down costs further. The introduction of quotas has thus

not changed the direction of change in land use by dairy farming, and indeed may have reinforced it. The quantity of land used continues to fall and, as discussed below, the remaining land is worked more intensively.

sity was also evident in Holland prior to quotas and, although data are not included for 1987, one might expect a similar pattern to the UK here: a temporary reduction in stocking rates as producers adjust to the new system and then a resumption of the trend of intensi~cation.

The land released from dairying will The evidence suggests that the route

be used for some other profitable pro- to improved profitability remains the duction, though the actual use will simultaneous reduction of forage area vary across countries and according to per cow (increasing stocking density the relative profitability of the alterna- on Dillen’s definition) and the amount tive enterprises. In the UK these of cereals fed per cow. This means ‘knock-on’ effects have been greatest that the dairy industry is progressively in the cereals and sheep sectors. The using less land and working its remain- land released from dairying will have ing land ever more intensively. Higher to some extent undermined the set- yields of milk per hectare are achieved aside policy introduced to help control by applying greater quantities of ni- cereals production. Extensification trogen fertilizers to produce more sil- policies are currently being developed age for feeding. High nitrogen ap- for the livestock sectors in an attempt plications can have direct effects on to control production of these com- the environment by causing nitrate modities, and again the knock-on leaching into water courses, and in- effects of milk quotas will tend to direct effects by increasing the amount undermine these policies. of slurry produced by the herd.

The ‘quality’ of lund use The increased emphasis on cost reduc- tion has been good for farm incomes in the dairy sector, while the quota system has been successful in halting the increase in milk production. However, the impact on the quality of land use may not have been so benign.

The recent report by Dillen states that stocking rates have fallen as a result of qu0tas.s However, the data are not conclusive. One of the prob- lems is that Dillen uses figures for the areas of forage crops and grass per dairy cow, ignoring the cereals area devoted to dairying. If the increase in the forage area has simply offset a decline in the cereals area devoted to the dairy sector, than no extensifica- tion can truly be said to have occur- red.

These trends in the quality of land use cannot be wholly attributed to the operation of quotas. Similar effects would have resulted from a policy of price pressure, whereby support prices are repeatedly cut in an attempt to discourage milk production. Under both policies there is an incentive for producers to intensify production in an attempt to maintain or improve farm incomes.

Conclusions

The fundamental problem of EC agri- culture remains one of overproduction of the main commodities. One policy that appears to have achieved its de- sired objective in controlling produc- tion has been milk quotas, the effects of which have been described above.

S5illen, op tit, Ref 3.

The area of fodder crops and grass per dairy cow has risen in Denmark, but this seems to be a continuation of a pre-quota trend. The figures for the UK reveal an opposite trend prior to quotas, with rising stocking rates, but then a decline in stocking densities between 1983 and 1985, followed by an increase again beween 1985 and 1987. The trend towards higher inten-

Surpluses have arisen due to the increasing intensity of agri~uIturai production: increasing milk output per hectare. While quotas have successful- ly limited milk production and allowed dairy farmers to raise their incomes relative to other sectors, they have done nothing to halt this underlying trend of intensification,

The EC remains in surplus in milk and the quota is certain to be reduced in the 1990s. However, quotas on their

LAND USE POLICY July 1991 209

own are unlikely to be an adequate policy for milk in the future for two main reasons: continuing land release from the dairy sector will undermine attempts to control production in other sectors of agriculture, and the continuing incentives to intensify milk production will increasingly conflict with environmental concerns.

A policy is required that will en- courage an extensification of produc- tion methods and thereby have desir- able effects on both overproduction and the environment. Such a policy may take one of essentially only two forms: either controls must be im- posed at the farm level on livestock stocking densities and the use of in- puts such as fertilizer, which would require monitoring and enforcement: or an input quota system could be introduced, whereby nitrogen fertiliz- er for example is effectively rationed.

Such a policy would ensure that, to

some extent, agricultural production takes account of the external costs and benefits of its impact on the environ- ment. In so doing it would tend to raise EC farmers’ production costs. So that EC farmers may recoup these costs, and so that consumers may pay food prices that reflect the benefit of a socially desirable rural environment. the EC would have to maintain import restrictions. However, since the policy would simultaneously control produc- tion and alleviate the need for subsi- dized exports from the EC, it would ease trade tensions and pressure on the EC budget. From the farmers’ point of view, the need for price press- ure to try to reduce output and control the budget would be removed, and they could again anticipate prices which fairly reflected the costs of (cn- vironmentally friendlier) production. It seems that a Pareto improvement could be achieved!

210 LAND USE POLICY July 1991